2017 Food Tech Landscape: The Push for CPG Innovation and the Omnichannel Restaurant

In connection with The Mixing Bowl’s “FOOD IT: Fork to Farm” event, held on June 27th in Mountain View, CA, Brita Rosenheim has released an updated version of her Food Tech & Media Landscape Map and provided some thoughts on the latest industry trends. For additional industry commentary, you can watch Brita’s interview on theCube from the event.

Food Tech Consolidation?

As I had confidently asserted in Fortune’s predictions at the beginning of last year, “The 2016 Fortune Crystal Ball”, “consolidation is absolutely on the menu for 2016 and it may fast become the main course”. But while there has still been a steady stream of M&A in the food tech sector since then, M&A activity was down year-over-year from 2015 to 2016, and 2017 year-to-date hasn’t yet spiked much. What happened?

In thinking about this imminent M&A “reckoning” I was focused on the meal delivery/last mile food category in particular, given so much money had flooded into the space, the high hurdle to manage customer acquisition and logistics expenses, and the extraordinary effort needed to secure the right type of growth metrics that would compel the next round of funding. As we have seen with Blue Apron’s public debut over the past month, even the leader of the pack is struggling to properly position its growth story and business metrics to the investment community.

Obviously, there is one recent significant acquisition that is on everyone’s mind (which I will discuss further below), but that is a transformational acquisition, rather than indicative of the full sector consolidation I had in mind. While it was clear to me that many of the smaller companies would shutter, I had thought the private market overhang would have given way to a significant number of opportunistic acquisitions – i.e. that there would have been more soft landings over the past 18 months for startups that weren’t able to secure the required growth capital.

However, unlike what we have often seen in other tech-based sectors, the meal delivery and on-demand food categories haven’t supported very many soft landings or aqui-hires for companies of any size (excluding pure online ordering marketplaces, which in contrast, have seen significant geo-driven consolidation). Instead, even well-funded companies abruptly pulled the plug versus even securing any type of asset sale, including the recent shuttering of Maple ($30m in investment) and Sprig ($57m in investment).

While it’s true that companies shutter abruptly all the time in the tech world, what’s notable about this category is that, despite the significant influx of VC funding, there has been no opportunity for significant M&A-driven return on investment. Fundamentally I think this is because there has been little tech in many of these foodtech companies, and thus the product/services/customer base within the meal delivery category didn’t provide a foundation of assets that more “scalable” tech-based companies typically leverage to augment an acquirer’s platform in a sale (including IP/systems/programmers). Plus, with the high customer churn across the industry, the value of a customer base to an acquirer is surprisingly less than one might think. And finally, it turns out that the incumbents who I had pegged as likely acquirers just didn’t have the appetite or urgency for integrating these types of businesses.

Strategics Look to Investing vs. Acquisitions

Alongside financial investors continuing to increase their bets on a number of growth stage companies in the meal kit and on-demand space, an increasing number of incumbents have bypassed the acquisition route and have instead been looking to leverage strategic investment as a way to build relationships and establish an innovative learning channel outside of the corporate structure.

Recent examples include Nestlé’s investment into Freshly’s $77m round, Campbell’s $10 million investment into Chef’dUnilever’s investment into Sun Basket’s $9 million round, and while it is not an investment, it is notable that Tyson Foods is leveraging a partnership with Amazon (and other retailers) to launch meal kits called Tyson Tastemakers. Each CPG is approaching these strategic investments in a different way, for example Nestle does not currently contemplate product placement with Freshly, while Campbell’s sees Chef’d as an opportunity to selectively merchandise with recipes.

Given the organizational and cultural integration challenges between a tech startup and an incumbent CPG, perhaps the best way to get a front row seat to new channels and innovation – for now – is through partnerships and investment, rather than acquisition. At a minimum, new strategic investment arms are helping to give the old food incumbents the appearance of being more innovative. Time will tell if this is real meat or just sizzle.

Whole Foods + Amazon Impact for CPGs and Restaurants

On the other side of that coin, we have the acquisition of Whole Foods by Amazon, a transformational and disruptive transaction with countless potential ramifications across the entire US food system, from fork to farm. Amazon will avoid many of those initial integration challenges by letting Whole Foods continue to operate separately, but it is expected that the powerful combination will still result in massive change to the industry.

Beyond the obvious grocery retail and ecommerce categories, Amazon’s largest acquisition has the potential to change the very nature of the food products and meals that shoppers will be purchasing, irrespective of whether they are customers of the two retailers or not.

As I discussed with The Boston Globe, incumbent CPG companies, which are already wrestling with how to both compete against, and yet also play with, a growing cast of on-trend brands and various direct-to consumer models, will now have to wrestle with the competitive reality of two nimble and well-regarded private-label food/grocery brands, which are now bolstered by a foundation of an IP-driven, customer-centric sales experience.

It will take some years, but the impact will be seen in the baskets across the US (and beyond), as large CPGs push to offer more competitive and on-trend product offerings through shorter innovation cycles. Whether through continued partnership or investment, CPGs need to be more nimble than ever in how to continuously reinvent their product offering and distribution strategies to keep up with the impending new world order.

Similarly, the increased competition from a more streamlined grocery category has significant implications for the restaurant industry, especially the casual and fast casual segments. Given Whole Food’s extensive prepared foods offerings, and Amazon’s superior logistical capabilities, the prepared food and meal kit offerings from an Amazon-driven “grocerant” platform have the potential to trump the convenience and price point of a local restaurant.

While an increasing number of restaurant operators have begun to digitize operations, still just a minority have dipped their toe into online ordering and delivery, and even fewer are optimized for mobile. Further, while many of the restaurant tech startups in the space are often concerned with the experience and perspective of the consumer, it is equally important to invest in streamlining the back-of-house operations in order to support a successful online ordering and delivery experience.

Thus, in order to remain competitive within this new era of off-premise-driven “dining”, successful operators will need to allocate more investment into technological infrastructure and channel partners, internal training to support delivery and takeout, and specific menu development for items that hold up well to travel. It certainly won’t happen overnight, but this acquisition will raise the bar in terms of consumer expectations of immediacy and convenience. The strongest restaurant operators will set the pace for a new era of quality and experience, which will most certainly trickle through the rest of the industry.

Landscape is available for download here.

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